The EU Commission wants to protect small investors better. From their point of view, there is a lack of important and easily understandable information for consumers when investing. The authority is also critical when consultants collect commissions on the sale of financial products such as old-age provision. However, the small investor strategy presented by the authority this Wednesday is controversial.
What is the goal of the retail investor strategy?
According to a draft for the new rules from the beginning of May, which is available to the German Press Agency, small investors in the EU should be able to achieve better investment results than is currently the case: consumers are currently exposed to a growing risk, for example from unrealistic marketing information being inappropriately influenced. Some investment products are also associated with unjustifiably high costs.
The responsible EU Commissioner Mairead McGuinness would like to deal with rules for the purchase of financial products. In investment advice, more than in any other area of financial services, it is important to avoid conflicts of interest, she said in a speech at the end of April. A commission ban was therefore discussed for a long time in Brussels.
What are commissions?
Investment advice is not for nothing: “Be aware that investment advice always costs something – either a commission priced in or a fee,” explains the financial regulator Bafin. Banks and insurers pay investment advisors a commission for the sale of fund units or life insurance, for example. The commission is financed from the investment sum or the income generated from it, so the customer pays indirectly.
An alternative is fee-based advice. Here the customer pays for the advisory service itself, for example according to the time spent or agreed as a flat rate – even if the investor ultimately decides against the recommendation of the advisor.
What could the Commission propose?
The Commission is expected not to propose a full ban on commissions for the time being. The Brussels authority’s draft law only provides for a ban on commissions for certain purchases without advice.
According to the draft from early May, a total ban would have “significant and sudden effects on existing distribution systems with consequences that are difficult to predict”. However, three years after the proposals have been adopted, the Commission wants to review their success and, if necessary, propose stricter measures.
How does the financial industry see the plans?
The General Association of the German Insurance Industry had already criticized that the Commission’s goal of bringing broad sections of the population to the financial markets and making it easier for them to accumulate wealth was only partially achieved. In general, the financial industry had spoken out against a change to fee-based advice only.
In particular, consumers with small and medium investment amounts would be cut off from the advice because it would be too expensive, argues the German banking industry, in which the five major banking associations are organized. Germany’s top insurance supervisor, Frank Grund, also recently confirmed that Bafin had always been skeptical about a commission ban. At least “more complex old-age provision regulations” require appropriate advice, which must also be paid for accordingly.
What are consumer advocates asking for?
From the point of view of consumer advocates, on the other hand, commissions create a conflict of interest that can lead to the recommendation of expensive or unsuitable investments. “As far as we know, the Commission has identified serious problems in the brokerage of investment products,” said Dorothea Mohn from the Federation of German Consumer Organizations (vzbv). “It is extremely disappointing that the Commission has not yet taken the side of consumers and obviously does not want to propose a general ban on commissions under pressure from the financial lobby.”
Discussed measures such as a more stringent suitability test and good qualifications for agents or a so-called cost benchmark to reduce costs make sense. “The problem of the conflict of interest due to commissions would not be tackled at the root,” said the head of the financial market team at vzbv.
Is everything being implemented as the Commission envisages?
That is very unlikely. Once submitted, the Commission’s proposals will have to be discussed by both the European Parliament and the EU countries. Parliament must find a common position and the EU countries must also agree on a compromise. Parliament and the federal states then negotiate. Only when an agreement has been reached here can the new rules come into force. Experience has shown that this takes at least several months.
Also read: How to invest 50,000 euros correctly